In this segment, Gary Wilderton discusses the concept of transfer value, a crucial aspect of business valuation beyond just financial worth. He explains that even if a business has a high calculated value, its transfer value might vary significantly based on factors like customer reliance, employee competency, operational structure, and brand reputation. Wilderton emphasizes the four pillars of goodwill—customer, employee, structural, and social—which determine the additional value a business holds above its liquidation worth.

For customer value, factors like revenue diversification, recurring revenue, and customer loyalty drive value, while employee value is gauged by competency, experience, and management depth, allowing smooth operations without the owner. Structural value relies on solid processes and KPI tracking, ensuring the business can run independently of the owner’s daily involvement, and customer relationships are held by the team rather than the owner.

Social value evaluates the company’s market reputation, brand strength, and customer advocacy, with higher scores enhancing its appeal and worth. The Exit Planning Institute’s method, which assigns a transfer score from 1 to 6 on these pillars, reveals that businesses scoring high in transferability fetch higher valuations due to strong desirability and minimal risk.

Comparing two sample businesses, Wilderton illustrates that a business scoring well across the four pillars has more transfer value, even if financial metrics are similar. Businesses with scores above 72% attract a premium, while those below 45% transfer value are often valued only for liquidation.

The video wraps up with the importance of transferability in valuations, noting that those below 45% on the transfer scale rarely sell successfully. Wilderton encourages viewers to apply these insights as they move to the next segment in the series.

Full Transcript:

Let’s go to the fourth part. So this Gary Wilderton is your section. This is all about transfer value because we’ve just calculated the financial value of a business. Right?

Math doesn’t lie. We’ve used market multiples, and we’ve used classic valuation methods, which I showed you. We’ve looked at how the structure of the deal can change the valuation based on forty deals that I and Proteges have done and how closing payments and valuations impacted each other. We’ve then looked at those forty deals in terms of seller psychology and how the calculated MUD scores and the calculated RLEV scores combined, the kind of sense of the seller psychology and how they are in terms of the deal, how that translated to price and structure.

Now let’s look at transfer value. Because even because a business has got a financial valuation, psychology might change it, the structure of the deal might change it. All that’s well and good. But if you can’t transfer that business to somebody else, it’s got zero value or liquidation value.

So what do I mean by that? Well, let’s go back to the valuation method we used at the start. So we looked at that business, and we thought it was worth a million dollars, give or take, using the EBITDA multiple method. Right?

And we also calculated what the liquidation value of the business was. So for the seller to shut the business down and liquidate the balance sheet and walk away with the cash, they’re only gonna get four hundred thousand dollars. So if we’re evaluating it at a million dollars in terms of the total equity value let me just go back down to actual size, then we know that that six hundred thousand dollar difference is the goodwill. And we can break goodwill down into four pillars, customer, employee, structural, and social.

And what’s amazing about this is we can measure what they are and how it’s gonna impact the value. So all of these pillars, if you’ve got a business that’s got phenomenal customers, right, phenomenal, then that would drive the valuation up. It would make it a best in class business. But if it’s got, like, really bad employees, that would be a value killer that would lower the valuation.

If it’s got great, structural capital in terms of its systems and its processes and its KPIs, again, that would make it more of a best in class business that would drive valuation.

But then if it’s got poor social capital, so a bad reputation in the market, a terrible brand, a terrible culture, that’s gonna kill and erode value. But we can measure all this.

So here are the value drivers that I use for customers. I’m looking for diversification of customer base. I don’t want any business with more than twenty five percent of its revenue concentrated with one customer. I like recurring revenue.

Recurring revenue is a good thing. I like customers with a long tenure and with long term contracts in place. And I like, I like a business where that target co is an integral part of the customer’s operation so that the customer can’t just swap and change and go to somebody else. We’re baked into a supply chain or we’re baked into a process or we’re we’re really kind of important to the way our customers, do business.

We’re more partners than than kind of customer, and supplier.

When I’m looking at employee value drivers, I’m looking at what’s the talent and the competency of the employees in the business. I’m looking at their experience, and I’m looking at their tenure. How long have they been there? I’m looking at their management skills, and is there any ongoing training? And then is there a minimum middle management layer in that business that if the owner leaves, the middle management layer can run the business without the owner being there? And then I wanna gauge, do they have real solid customer and market knowledge? Are they experts in in their fields?

We also look at structural value drivers. So, again, I don’t want the owner to have to be in the business. I don’t want the owner to have to be in the business for it to work. If the owner’s part of the business day to day and the business isn’t gonna work if the owner’s leaving, that’s a killer of value.

I want all the SOPs and process to be fully documented. I want systems and KPIs in place to drive performance. I wanna see leading and lagging indicators that they’re monitoring weekly inside of their operation. And I want all the customer relationships to be owned separately to the owner. I want the team that’s gonna be left to run the business for me to own all the customer relations. I don’t want the seller to own them because if the seller leaves, there’s a chance that some of those relationships won’t get handed over properly.

And then the social value drivers that I look at are, does this company have a strong culture? Does he have a strong paternal brand and reputation in the marketplace?

Does he have raving fans versus customers? Are my customers constantly referring new customers to this business? And has he won any awards? And what you can do across those four pillars is you can score them.

One to six. One would be it’s a really bad business. It’s gonna kill value. Six would be best in class. It’s gonna drive value. And then the average would be somewhere in between three and four.

So let’s look at two businesses, business a, business b.

Business a scored two out of six on average. Business b scored four out of six for customer value.

For employee value, business a scored three out of six. Business b five out of six.

Structural value, business a score two out of six. Business b five out of six. And then social value, business a score two out of six. Business b four out of six. So which is the strongest business? Which business has more value? Let’s say the two businesses are identical.

Both doing two million dollars in revenues, both making seven hundred thousand dollars in EBITDA. One scores thirty seven point five percent on the transfer scale.

They score seventy five percent value on the transfer scale. Which business has got more value? Which business be? Right? Because it’s hitting higher marks on those four pillars of transfer value. And what the Exit Planning Institute do, which is really, really cool, is they show you how to calculate, which is amazing. So if this is a normal distribution curve of valuations of businesses based on how all those metrics score so if you’re up here and you’re absolute best in class, anything north of seventy two percent transfer value, you’re gonna be paying a fifty percent premium at least to buy that business.

Sometimes a hundred percent if this is, like, the best business in the world. It scores six on everything, you’re gonna be paying a lot of money for that business because the owner’s probably not gonna be motivated to sell, or there’s gonna be a lot of people wanna buy that business because it’s best in class. Most businesses are average.

So, generally, between forty five and seventy two percent classifies an average business. If your transfer value is between fifty eight and seventy two percent, then there would be no adjustment for transfer value. You just apply the industry average multiple.

But between forty five and fifty eight percent, you’re gonna be applying both at first to twenty five, then a fourth, then a fifty percent discount to that industry average multiple. Anything below forty five percent transfer value is an automatic liquidation value only business.

And the Exit Planning Institute have have researched this over hundreds of thousands of deals, not the forty deals that I’ve done. And where they’ve analyzed all those deals and the transfer value has been less than forty five percent, inverts the old cases, the seller had to liquidate the business because there was nobody there to go and buy it. There was no value in that business to be transferred to a new owner for that premium. But if you really wanna take evaluation skills to the next level, you’ll need to know how to implement everything that we have just learned. So that’s exactly what we’re covering in the next video as we wrap up our valuation series. Watch that video right there, and I will see you guys soon. Until then, bye for now.